October 30, 2012

Germany's Energy Policy: Man-Made Crisis Now Costing Billions

October 30, 2012

The German people are “up in arms” about energy. Yes, energy—the commodity that affects us every day—our clothes, our food, our entertainment, our transportation, and even our medical treatments. For Germans, electricity prices are soaring as a result of phasing out nuclear power and mandating renewable energy. Consumers in Germany are facing the biggest electricity price increase in a decade and those price increases will continue. It is estimated that by 2030, Germany will have spent more than 300 billion Euros on green electricity. And consumer groups are complaining that about 800,000 German households can no longer pay for their energy bills.

If this rise in energy prices continues, household energy bills could exceed the rent Germans pay for housing in parts of the country. Because renewable technologies are not economic compared to traditional fossil fuel technologies, Germans have had and will continue to pay an additional increasing premium for their use. Because of this premium, electricity prices are expected to increase by over 10 percent next year—the largest increase in a decade. Americans should watch what is happening in Germany regarding the electricity rate base and in other parts of Europe, such as Spain, in their march to build renewable power.

The German Electricity Sector

The German government wants 80 percent of its energy to be produced by renewable sources by 2050; biomass, wind, and solar currently make up about 25 percent of the country’s electricity supply. The country has begun to take fossil fuel power stations offline and is planning to phase out nuclear energy by 2022. However, the cost of these changes has resulted in up to 800,000 households not being able to pay their bills and placed a strain on existing capacity in the electrical grid. Although Germany has made significant investment in wind and solar power, it faces an energy shortfall, partly because it has insufficient transmission lines to bring wind power from the North Sea to the industrial centers in the south and partly because the sun doesn’t always shine and the wind doesn’t always blow.[i]

In 2009, Germans spent about 100 billion Euros ($130.5 billion) for energy, an average of 2,500 Euros ($3,263) per household. On average 34 percent of net household income in Germany is spent on rent and energy. According to the Association of House and Apartment Owners, energy prices have increased far more than rents in the past 15 years. And, according to the Association of Energy Consumers, heating and hot water costs comprise 41 percent of bills on average and those costs are increasing.

Next year, electricity prices in Germany are expected to increase by more than 10 percent. Much of this increase is driven by a surcharge to cover the costs of using more renewable energy. The renewable surcharge is the difference between guaranteed prices mandated to be paid for renewable energy and market prices for conventional energy. The renewable surcharge will increase by 47 percent—from 3.6 Euro cents (4.7 U.S. cents) per kilowatt hour in 2012 to 5.3 Euro cents (6.9 U.S. cents) per kilowatt hour in 2013.[ii] To put this in perspective, in the United States, the average residential retail price of electricity is 11.80 cents per kilowatt hour, so Germany’s renewable surcharge in 2013 alone will be 58 percent of the total cost of residential electricity in the United States. This helps explain why residential electricity rates in Germany are almost triple those in the United States, at over 33 U.S. cents per kilowatt hour.

These electricity price increases are far from over. A three-person German household paid on average 40.60 Euros ($52.98) a month for electricity in 2000; it is now 75.08 Euros ($97.98), an increase of about 85 percent. Depending on the expansion of offshore wind power and photovoltaics, electricity prices are expected to increase another 30 to 50 percent in the next ten years.

The high power costs are not only affecting households but German industry as well where its competitiveness is deteriorating. According to a recent survey by the Association of Industrial Power Industry, Germany ranks fourth in terms of having the highest industrial electricity prices in the world. Electricity is more than 30 percent cheaper for industrial companies in many Asian and European countries and it is more than 50 percent less in the United States and Russia. Businesses will always consider cheaper electricity when deciding where to produce products.

After Germany’s four leading electrical grid operators announced that they would be increasing the charge to consumers that goes into financing subsidies for producers of renewable energy,[iii] the German government decided to extend its caps on subsidies for solar energy to more technologies including wind and biomass. The plan is designed to contain the rising costs of phasing out nuclear power. Due to the surcharge, consumers in Germany face an extra 59 Euros ($77) on their power bills next year based on an average 3-person household consuming 3,500 kilowatt hours per year.[iv] (An average U.S. home, larger and with more labor saving devices, uses about 11,500 kilowatt hours per year.)

The proposals announced to reform the clean- energy subsidy system mark the most sweeping changes to Germany’s support mechanisms for renewable energy since the country adopted feed-in tariffs in 2004. Those rules granted renewable generators above-market prices for the power they produce and made Germany the world’s biggest market for solar panels.

Germany spent about 16 billion Euros ($20.88 billion) on clean energy technologies in 2011; next year it is expected to spend 20 billion Euros ($26.1 billion). According to a study by the Technical University of Berlin, by 2030, it is estimated that Germany will have spent more than 300 billion Euros ($391.5 billion) on green electricity.

Germany is not the only country curbing incentives for renewable power; Spain, France, Italy and the U.K. either have or are curbing their incentives for renewable energy.[v] For example, the U.K. cut its feed-in tariff for solar panels by almost 25 percent[vi], and its onshore wind subsidy by 10 percent[vii]. In 2009, 4 million U.K. households (18 percent of households) were in fuel poverty, having to spend more than 10 percent of their household income to keep their home in ‘satisfactory’ condition.[viii]

Conclusion

While renewable energy is increasing its role in electricity generation and energy supply in the United States, its share is still small. In 2011, non-hydroelectric renewable power supplied 4.7 percent of our electricity in the United States, with wind and solar power combined supplying almost 3 percent. In terms of total energy supply, wind and solar power provided a 1.4 percent share in 2011. But Americans are paying for renewable technology development through subsidies, mandates, and failed loan guarantees.

More than half the states have renewable energy standards that mandate a specified share of electricity come from qualified renewable technologies. Both the federal government and state governments provide subsidies and tax breaks to these technologies. And many renewable producers have received grants and loan guarantees from the federal government to spur innovation and production to only have these companies go bankrupt, losing billions of taxpayer dollars. (For a list of bankruptcies, click here.) So far, increases to utility bills have not been so large that Americans are struggling like those in Germany or other European countries. However, implementation of their policies would likely cause similar results. Americans should beware of policies seeking to duplicate German and other foreign country green energy policies; they are quickly reversing themselves as the real costs become evident.